Six Sigma Pricing Part 1: Using the Right Data
Obtaining pricing excellence requires a disciplined approach to drive continuous improvement, based around data. This is where the Six Sigma methodology helps drive real results that are focused on profitable growth. When you know the right data to analyze, you’re able to shape the results you want.
Over the course of three articles, we’ll apply Six Sigma approaches to guide disciplined process driving continuous pricing improvement. In this first installment, we’ll discuss Six Sigma as a Transfer Function and how this equation applies to pricing. This is a way to describe and apply a process in statistical form — or a way a company makes a profit.
Six Sigma as a Transfer Function
Six Sigma is often defined as a business management strategy that uses statistical methods to identify defects and continuously improve performance. While these approaches certainly apply to sales and commercial teams, the data-driven core of Six Sigma efforts can sometimes seem abstract, and even intimidating, to sales and other commercial resources. After all, these teams often think of their roles as being more relationship-oriented and less measurable in key areas.
We try to explain the relevance of Six Sigma methodology in the commercial world in a different way – as a Transfer Function. Thinking in these terms can help you better identify opportunities that drive impact in targeted areas, and also understand more clearly how other elements of the business might be affected.
How the Transfer Function Applies to Business
A Transfer Function is an equation that theoretically defines the relationship between the output of a system or process and its inputs. This can be represented as:
That may still seem pretty technical, but we promise it gets simpler. What this equation is describing is that “Y” (the output) is the result of the interaction of the inputs (the “x” values). Here’s an example of how this could apply at a business level:
In this example, Profitability is the output. Improving Profitability requires driving changes to one or more of the inputs (Sales, Pricing, Costs, Expenses, etc). You don’t just “fix” Profitability. You improve one or more of the inputs to yield a better overall output.
See How Changes to Your Inputs Affect Your Output
The Transfer Function represents our process in the form of an equation that can be applied at any level in the organization. Let’s take it down one level and make it specific to pricing:
This is a level you can start to build improvement projects around. Any of the inputs here could potentially be improvement targets that are able to be tracked to direct pricing, and ultimately impact profitability. One important consideration here is that changes to one input can affect the other inputs due to the fact that they interact.
For example, changes to pricing exception controls could end up impacting sales. Similarly, significant changes to sales can impact costs (positively or negatively) since they are typically linked to volume. It’s important to consider and ideally measure the impact that those interactions will have.
Focus on the Inputs Instead of the Outcomes
Incorporating the right data into your decision making is extremely important. If your team can look at the same data/information as your competitors and make a better, faster decision, then you will . By understanding the key inputs of a process (or key inputs to a decision), then you will better predict the outcome. This means your team can determine if a proposed opportunity is going to be good or bad for your business.
Decision making comes down to evaluating something before you know all the facts. You’re weighing whether to take on a piece of business or allow your competitors to have it.
If you can make decisions faster than your competitors, then you have first choice on every opportunity.
Are You Making the Right Decisions?
Are you focusing on the right data and making the right decisions when you see the data? In this case, focus on the inputs (the variables that drive pricing results) to result in better profitability.
Transforming the data you have into meaningful actions is the crux of great decision making as a competitive advantage. Every company has data, but if you don’t correctly analyze what you have, then you can’t use it to improve your results. If you don’t put it in the hands of your team to make decisions easily, then it’s just sitting data, which is a missed opportunity to improve your pricing process.
We’ll continue to explore applying Six Sigma methodology to pricing in two future articles. Stay tuned to learn how to sustain the gains and automate the pricing process by applying Six Sigma thinking.
We’d be happy to help you, no matter where you are in your pricing improvement journey. Please feel free to contact us with any questions you have.